November 13, 2015
Bipartisan Budget Act of 2015
By Michael D'Addio, Principal, Tax & Business Services
The President has recently signed the Bipartisan Budget Act of 2015, which contains a number of tax- related provisions.
- Elimination of TEFRA and Electing Large Partnership rules for IRS partnership audits in favor of a new streamlined procedure.
- Clarification of the definition of "partner."
- Repeal of the automatic enrollment requirement under the Affordable Care Act.
- Several Defined Benefit Plan rule adjustments to interest rates, mortality and PBGC payments.
- IRS Debt Collection.
Partnership Audits and Adjustments
Currently, IRS audits partnerships under three regimes:
- Partnerships with 10 or fewer partners: IRS generally audits the partnership and each partner separately for the year under audit. This provides each partner with separate administrative rights and oftentimes leads to inconsistent treatment among the partners. These partnerships can elect to have the TEFRA audit rules apply.
- Partnerships with more than 10 partners and certain other partnerships are audited under the "TEFRA" rules (which have been in place since 1982). IRS makes adjustments to certain "partnership items" at the entity level (instead of the partner level). The audit is conducted through a Tax Matters Partner selected by the partnership, who acts as a liaison with the IRS. The results of the TEFRA adjustments are allocated to the partners, and their returns for the year of audit are adjusted.
- Partnerships with 100 or more partners can elect to be treated as Electing Large Partnerships, where partnership adjustments generally affect the partners for the year in which the audit occurs, rather than the year under audit.
For tax years beginning after 2017, the bill repeals the TEFRA and Electing Small Partnership rules and creates a new "streamlined procedure" for partnership audits. IRS will examine partnership items of income, gain, deduction, loss, credit and distributive shares for a partnership tax year (the "reviewed year"). However, adjustments will be taken into account by the partnership (instead of the individual partners) in the year the audit or judicial review is completed (the "adjustment year"). Where the adjustments produce additional income or gain, the IRS will calculate a partnership-level "imputed underpayment" based on the highest marginal tax rate for the year. The partners will not be subject to joint and several liability for any such partnership level liability.
A partnership will be given the option to demonstrate that a lower imputed underpayment is proper based on certain partner-level information, which can include: a) amended returns of partners; b) the tax rates applicable to the types of partners (e.g., individuals, corporations, tax-exempt organizations); and c) the type of income subject to adjustment (e.g., ordinary income, qualified dividends, long-term capital gains).
Partnerships with 100 or fewer "qualifying partners" can elect out of the new streamlined regime. Where this election is made, the audit will be done at the partnership and separate partner levels.
A partnership will also be able to initiate an adjustment for a reviewed year when it believes additional payment is due or an overpayment was made, with the adjustment taken into account in the adjustment year.
There is time before this provision becomes effective. The IRS will need to issue guidance relating to these new rules and the elimination of the TEFRA and Electing Large Partnership Rule.
Additionally, given the delayed effective date, it is possible that the new rules may undergo changes before date of application. They raise significant questions where:
- There are changes in ownership and/or partnership allocations of income or losses between the review and adjustment years.
- There are multi-tiered partnerships that must also be considered.
Partnership agreements will need to be reviewed to consider the impact of these changes. In particular, the possibility of an entity-level tax responsibility (which runs counter to the normal flow-through structure of partnerships) must be addressed.
Partnership Interests Created By Gift
A technical "clarification" is made in the definition of a "partner." There was some question as to whether the family partnership rule, treating an owner of a capital interest in a partnership as a partner if capital is a material income-producing factor in the entity, created an alternate definition. This position would ignore the basic definition of a partnership as an unincorporated organization in which the owners have joined together with the purpose of conducting an active trade or business.
The Budget Bill clarifies that Congress did not intend for the family partnership rules to provide an alternative test.
Repeal of Automatic Enrollment Requirement under the ACA
The bill repeals the automatic enrollment requirements of the Affordable Care Act for employers with more than 200 employees, offering a qualifying health plan. The Department of Labor was tasked with issuing regulations to implement these rules, but they were never issued.
Automatic enrollment remains an available option for an employer.
Defined Benefit Plans
A new law makes a number of changes to rules related to defined benefit plans.
- PBGC Fixed Premium: Single-employer defined benefit plans pay a fixed premium to the Pension Benefit Guaranty Corp., which is subject to indexing for inflation. The amount is $64 per person in 2016. Under the new law, the premium will be raised to $68 for 2017, $73 for 2018 and $78 for 2019. Thereafter, the amount is indexed for inflation.
- PBGC Variable Rate Premium: Single-employer defined benefit plans also pay a variable rate premium scheduled to be $30 per $1,000 of underfunding for 2016. This premium will continue to be indexed for inflation and will also be increased by $2 in 2017, $3 in 2018 and $3 in 2019.
- PBGC Payment Acceleration: The due date for premiums (generally the 15th day of the 10th full calendar month of the premium payment year) will, for plan years beginning in 2025, be the 15th day of the 9th calendar month beginning on or after the first day of the premium payment year.
- Mortality Tables: While Treasury prescribes mortality tables for calculating pension liabilities, Plans may apply to Treasury to use a separate mortality table. Plans qualify to use a separate table only if (1) the proposed table reflects the actual experience of the pension plan maintained by the plan sponsor and projected trends in general mortality experience, and (2) there are a sufficient number of plan participants, and the plan was maintained for a sufficient period of time to have credible information necessary for that purpose. The new law will expand the use of separate mortality tables for plan years beginning after December 31, 2015. The determination of whether the plan has credible information shall be made in accordance with established actuarial credibility theory, which is materially different from the current rules. In addition, the plan may use tables that are adjusted from the Treasury tables if such adjustments are based on a plan's experience.
- Extension of Funding Stabilization Percentages: DB plans must use certain specified interest rate assumptions for computing the minimum required contribution. Prior law adjusted the range of rates permitted to be used. The Bill extends these rules for plans through 2019.
The Budget Agreement authorizes the use of automated calls to cell phones to collect debts owed to the U.S. government. Regulations providing guidance are to be promulgated within nine months of the date of enactment of the bill.
Unfortunately, this Budget Bill did not address the many tax provisions that expired at the end of 2014 and which are expected to be restored at some point before the end of the year.
If you have any questions concerning these changes, please contact your Marcum tax professional.